Ecommerce Model of Groupon Essay

Custom StudentMr.
TeacherENG
1001-04
14 February 2017

Ecommerce Model of Groupon

1. Introduction

As dynamic pricing mechanism been introduced, buyers and sellers can negotiate product prices in the market as well as the e-commerce market. Group-buying was appeared in the mid-1990s, and been popular in recent ten years as a business-to-consumer (B2C) transaction. Group buying, means provides products and services with deep low prices if buyers reach a certain number. Coupons are provided by manufacturers or retailers as a way of promotion.

They usually distributed via mail, newspapers, magazines, mobile phones and Internet. The early group buying business model has lots of problems, one of them is time factor. Retailers offer the discounted deal only if buyers reach minimum numbers. During this time, buyers may move to other stores or choose online shopping. After Groupon created the online platform, it allows consumers spread news about interesting items and persuading friends, colleagues or families join in. This decrease the time to get the deal. It’s a win-win model for Groupon and customers.

Based on Groupon website, annual reports, and some articles, this report aims to find out the value proposition, value configuration, market seek，and revenue model of Groupon through analysis the operation of Groupon and relationship between Groupon and their stakeholders: local merchants and customers. Then identify the challenge and potential risk of this e-commerce. 2. Background of Groupon

2.1 Bulid and development

Groupon is a company which first combined the group-buying and coupon. It launched on November 2008 in Chicago, after two years, there are 150 markets in North America, 100 markets in Europe, and 35 million users registered on their website. In 2012, the company was valued at $1.35 billion, became the fastest company to go from zero to$1 billion in revenues, while Twitter and Facebook used 3 and 5 years respectively achieving this goal. As recorded in Groupon’s 10-K report, annual revenue increased in a high speed, from $312 million in 2010 to $1.6 billion in 2011, increase about 400%.

2.2 Products of Groupon

An innovation of Groupon is it positioning their products as services and experiences such as vouchers of restaurant, travel and hotel; hair nail salons and spa. This new model is a basic guarantee for profit in low prices. For instance, 40% off tickets to an opera show, £80 worth of spa for £30，or a £700 Seven Days European Tour for £400. The deal can be divided into two parts, one is mail deal which shown on the homepage, another is side deal which shown in some cities. These side deals offer big discounts for customers but they are scarce. This innovation become a competition advantage because services product has high profit, the retailers can still earn lots of money although they set low prices on Groupon.

Compared with physical products (clothes, furniture, electrical equipment) which customers have high involvement, services products deals are more easier to succeed. Secondly, the value proposition of Groupon is offers a “Deal of the day” in every market. This means Group only add one new item for each city in one day. Products become more popular and competitive due to the limited supply. Moreover, Groupon make its homepage interface more simple and delicate, to make visitors feel energized, relaxed, focused, more ready to make a purchase.

3. The Operation model of Groupon ecommerce

The business model consists of four components, Groupon company, Groupon website, local business and customers. Groupon sell their products or services of their website, and these products/services based on targeting customers’ needs, offered by local businesses in some selected local merchants. The deal is valid when a certain number of users subscribe to the deal. Then customers can use the vouchers in a certain time, the vouchers can also be refunded within the stipulated time

Like most of the group buying sites, the main features of purchasing on Groupon are: buying online, dealing of the day, localized, and cooperate with local businesses. Groupon operate on the similar principles. Firstly, users need sign in for free to the website, then to choose cities where they living, as the discounts are localized. Then provide personal information about address, postcode, email address and contact number, because the vouchers will send via email or mobile phone, and be used in the same city. After signed in the website, Groupon will inform new items to customers every day by email. In May 2010, Groupon bought Mob.ly, a mobile company, which works to create mobile applications. Mob.ly had created applications for NBC, Yahoo! and other famous companies. Mob.ly was mainly to enhance Groupon’s mobile applications, then develop iPhone application used by customers to find and buy nearby deals, thus information becomes easy to be shared with friends on iphone, ipad and other Apple devices.

Groupon focus on mass communication and social networking site to promote their value products/services after company into mature stage. Expect updates daily news and products on official website, they also make use of Facebook and Twitter, encouraging people share with their families, friends and others to make the deal. Most of users who search and buy online are young people between 18 and 34 year old females. After combined ecommerce with the social networking site, news which is on everybody’s lips by oral communication, spreading like epidemic, customers do free advertising and branding for Groupon. Obviously, it’s a win-win model for Groupon and customers.

Groupon sell these items to customers in discount prices when a large amount of people want to buy the same item. One precondition is customers must pay it upfront, and then use the vouchers within a certain time, no more than a week, a month and so on. Groupon offer customers low-risk chances to experience new products and services which they haven’t tried before. The most valuable of this business model can nurture consumer’s attention behavior. The promotion is finish in a short time—usually one day, makes the anticipation of waiting for the next Groupon.

As Christopher Steiner said on Forbes magazine “It’s a cents-off coupon married to a Friday-after-Thanksgiving shopping frenzy.” This phenomenon can be called “group Groupon”—“the preoccupation and feeling of anxiousness and not being able to sleep knowing that a new Groupon will be released after 1:00 a.m. (Urban dictionary)

3.2 Local merchants

Basically，the core of this model is keep close relationship with local businesses. A part of their staff primary responsible for researching the local market, and discuss business or cooperation with them. The business started at 2010, after acquired CityDeal which is the second largest local deals provider, have more than 80 markets in 16 countries at the time of the acquisition. Groupon got the access to European markets. In the same year, Groupon signed contracts with The McClatchy, Media General these kinds of Internet and newspaper publishing companies, to enlarge popularity and attract more local businesses. For there providers, they get a platform, a new channel and advertising through cooperate with Groupon to reach out to a targeted customer base in local areas without having to spend any money.

Especially for some new and small businesses need known by new customers. And it is flexibility to set parameters such as maximum or minimum number of purchase of deal. The goal is let customers who are not normally visit their stores will be attracted by the deal and then become repeat customers. The deals act as online advertisements to increase the popularity of the products and services. Groupon pays the local businesses after taking a 40%-50% share of the revenue generated by the deal, without upfront fees for these local businesses that use the deals to market their goods and services.

Revenue share

Groupon make money by taking a percentage of the revenues from every deal purchased by customers. It decided by the size and number of deals. Number of deals is effect by the number of local cooperation businesses. Another factor is categories of products and services. Size of deals is dependent on the price and discount that offered to customers, and revenue share to local merchants.

4. Challenge and risk

Growing in a sharp speed, Groupon also faces lots of problems, including products, customers, local merchants, policies, competitors and funding risks.

4.1 Products limitation

Focus on local businesses and provide service or experiences for customers is a good way to reduce cost, in the same time, this strategy can only target part of customers. Another situation is a successful deal could temporarily swamp a small business with too many customers, if that there won’t be enough product to meet the demand. In such cases, local businesses ended up being unable to meet the delivery expectations and incurred huge losses. Businesses with unprofitable promotions have reported low rates of spending by Groupon users beyond the deal’s face value and low rates of return to the business again at full price.It will also be a risk that it will decrease customers’ satisfaction. Other situation is discounts become effect only if reach a certain number of people come to purchase the product or service, during this time, people will purchase in other stores or websites.

4.2 Customer benefit

For customers, there are risk two types of risks that will meet in group-buying auction. Firstly, they will involve uncertainty in decision-making, they can not compare the quality and price with other items, and this will increase anxiety and mental stress. Financial risk is a common element of risk. Consumers may be unsure of what they will have to pay and what a product is worth once they have bought it. Once they make poor purchase choices or miss the time to consume the paid vouchers, they will suffer both monetary loss and mental dissatisfy.

4.3 Local businesses benefit

A report published on the CNBC(Consumer News and Business Channel) indicates that Groupon has less helpful for local small businesses. Although they can get new customers to try their new products or services, but these customers are hard to become repeat customers. The coupon buyers tend to become repeat customers because they anticipate get the discount when they buy next time. But Groupon’s growth makes that result unlikely, after finish a deal, customers will try to purchase a new one but not visit again.

For local merchants, they offering 50% or more off the original price for a particular product or service, then share the half profit with Groupon, this means merchants are losing 75% of what they’d normally make for any given sale. Providing products and services at or below cost while there is no guarantee that those customers will return for another purchase, then after a period, the model cannot be sustainable if the local businesses don’t get paid to be featured, and terminate the partnership with Groupon.

4.4 Competition landscape

Groupon annual reports show that Groupon faces a huge competitive landscape and consumers suffer minimal switching costs while only around 20% of current subscribers actually purchase Groupons, The group buying strategy and model is easy to copy, because of the technical and financial barriers are relatively low, that leads to over than 500 sites appeared after Groupon, they are all similar with Groupon or just duplicate this model. Companies in this industry includes: LivingSocial, Yelp, Coupons, GilyCity, CouponCabin and Tippr, LivingSocial is a strong competitor for Groupon.

LivingSocial rank only second to Groupon, it offers deals in more than 127 markets and four countries. As for Living Social, it also has preferential policy and promotion methods, for instance, customers can get a free deal if they can get three other people to buy that same deal. For Coupon, it has licensees of some famous companies such as Kraft Food, McDonalds, and Johnson & Johnson, this strategy enhance the level and goodwill for Coupon and good for its sustainable development. Yelp, introduced a feature allowing public business owner comments. generates revenue by selling advertisements to local businesses as well as through sponsored search results. We estimate that Yelp made revenues of $30M in 2009 and $50M in 2010. Other ecommerce companies such as Facebook, Yahoo, and Woot also join in this trend.

4.5 Financial risk

As for Groupon’s revenue model, 50% revenue share is not sustainable in the long run, Groupon takes a 40%- 50% of the revenue from its deals, but his arrangement is not sustainable in the long run, because competitors could easily drive revenue away from Groupon by charging less, and cooperation merchants tend to supply products for Groupon’s competitors.

Report written by Peter Bo Kiaer, published on SAXO BANK website indicates that Groupon has high financial risk in 2012. Information flow reflects the operation and development of Groupon: how many bought goods, how many bought more than once etc. In term of local merchants, they also need the information and data to judge if they should cooperate with Groupon. But this information flow suddenly stopped. Peter said :”Maybe something has gone wrong somewhere in Groupon’s uptake of clients.” (2012). This be proved on April 2012, Groupon announced their quarterly revenue decrease by $14.3M and widened net income losses by $22.6M. Since the announcement, stakeholders feel disappointed.

5. Conclusion

To sum up, Groupon purchase is not only benefit for the customers to reduce transaction cost to get the favourable price under the promise of quality and service ensurance, but also give small businesses opportunities to gather customers, But on the other hand, Groupon also have problems of competitive environment, customers switch and financial challenges. Customers also worried about online group buying, and only young people take more concentrate on online purchase, most customers are still choose traditional purchases. For local merchants, they also faces the risk of lose profit and customers.

In the future, instead of charge more profit from merchants, Groupon need consider long-term cooperation with them to increase of group buying competition advantage. Such as reduce their own operating expenses, seek technologies’ innovations.